PRO-POOR HOUSING FINANCE IN ASIA

Xing Quan Zhang, PhD

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INTRODUCTION
With 60 percent of the worlds population, Asia is the largest and most diverse continent. Housing conditions vary greatly. East Asia including China, Japan and South Korea is the most developed region and housing conditions are relatively better. With 58 percent of South-Eastern Asia living in slums, related issues are among the highest publicpolicy concerns particularly in India. Bombay has 55 percent of its residents living in slums 1. Because rural population has reached capacity-limits, further population growth will be absorbed by urban settlements. However, there is currently little or no planning to contain these people or provide them with adequate facilities in those countries which are mostly affected by slums. On the other hand, some Asian economies have already solved their basic housing problems. Slums are remote concepts in South Korea, Japan, China and Singapore. In some Asian countries such as China and Vietnam, government were previously responsible for providing housing for everyone. Now massive privatisation movements have been introduced in these centrallyplanned countries, transforming them into market economies. Changing housing conditions can often be attributed to the introduction of market economies or market principles. Globalisation also drives financial liberalization in Asia. Asian financial markets are becoming more open. The inflow of foreign financial intermediaries and financial market reform and deregulation increase financial market efficiency and promote capital inflows and development, particularly in Asias emerging markets.

Asias diversity provides a large arena for experimenting with different finance instruments. This paper will look at the various housing finance tools and instruments currently used in Asia.

Wong S (2008) Poor Living Conditions in Asia, http://www.helium.com/ items/81472-backgroundthere-billion-people-living, 4/9/2009

Increased efficiency transforms into higher savings and investment returns, cheaper funding costs that facilitate financial market growth and reduced mortgage interest costs that increase affordability and accessibility. For example, 20-year mortgages are currently available at 5 to 6 percent interest rates in China, compared to 15 to 20 percent in some African countries. Housing finance market development varies from country to country. China, South Korea and Japan have relatively well-developed markets, with China the largest market, followed by Japan. Other countries such as Mongolia recently embarked on mortgage-finance development. Asias diversity provides a large arena for experimenting with different finance instruments. This paper will look at the various housing finance tools and instruments currently used in Asia.

securitising loans. Commercial banks pool large amounts of deposits and act as intermediaries to manage the mismatch between mostly short-term deposits and long-term housing loans.

MORTGAGE INSTITUTIONS
Bangladesh, Pakistan, Mongolia, Hong Kong and Malaysia developed specialised housing mortgage finance institutions. However, most mortgage finance loans in Asia are provided by nonspecialised mortgage institutions. China, Japan and Hong Kong are largest mortgage finance markets where in non-specialised mortgage institutions dominate the housing finance market.

HOUSING BANKS
Housing banks play different roles in Asia. Some housing banks play regulatory or supplementary roles in housing finance. Indias National Housing Bank primarily performs a regulatory role while Chinas housing banks played an initial experimental role in housing finance and exited when commercial banks began providing mortgage finance. In other Asian countries, specialized housing banks were developed as main housing finance instruments. In such housing banks, the government often plays an important role. For example, the governmentowned Korea Housing Bank (including its National Housing Fund) accounted for 80% of the countrys total housing loans in 1997. Housing banks have been one of the most commonly-used instruments by governments. The Government Housing Bank of Thailand introduced housing loans which were financed through bonds to avoid long-term finance mismatches with short-term deposits and also to reduce costs to make loans more affordable.

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MORTGAGE INSURANCE
Hong Kong has been actively promoting a mortgage insurance program through its Hong Kong Mortgage Corporation. Thailands Government Housing Bank began promoting the development of a mortgage-insurance company in 2005. Mortgage insurance makes mortgage financing more affordable and accessible to low and middle income households.

HIRE-PURCHASE PROGRAMS
Hire-Purchase programs help low-income people with poor credit-ratings and those who dont have down payments to purchase housing units. It provides low-income people access to housing through rental programs with purchase options within specific periods (for example, 3-5 years) if they prove their creditworthiness by making regular instalments 2.

PRO-POOR HOUSING FINANCE INSTRUMENTS IN ASIA

COMMERCIAL BANKS
Commercial banks are the most common financial institutions providing housing finance, particularly mortgage loans in China, India, Japan and Indonesia. They primarily raise capital with deposits or by issuing bonds and

UN-HABITAT (2008), Housing Finance Instruments in Thailand, Nairobi: UN-HABITAT

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Indias Housing Development Finance Corporation also introduced a contractual savings program that was eventually discontinued.

SPECIALISED HOUSING FUNDS

Various types of dedicated Housing Funds have been developed to target different population groups housing needs. Urban Community Development Funds and Urban Poor Funds target poor families. Housing funds in China and Singapore target the general population. Turkey established a Mass Housing Fund (MHF) in 1984 to provide substantial, steady fund inflows for housing finance. MHF was mainly funded through import and petroleum consumption taxes and provided subsidized low interest-rate loans. It does not mobilize savings from households, and therefore can be regarded 3 as a fiscal instrument . Thailand established a special Urban Community Development Fund (UCDF) to improve the poors livelihood and housing. The UCDF encourages poor communities to organize savings groups while enhancing their community-development loan-funding and management capabilities. UCDF provides three types of loans to community

savings groups: community development revolving funds, income generation loans and housing loans 4.

CONTRACTUAL SAVINGS AND LOANS PROGRAMS

China, Hong Kong and Singapore have developed contractual savings and loans programs. In Singapore, all citizens and permanent residents belong to a compulsory savings scheme Central Provident Fund (CPF). CPF contributions come from two related sources: payroll deductions and employer contributions based on a specific percentage of the employees salary. The percentages are adjusted from time to time to reflect economic performance, market conditions and employee age. The combined contribution rate was as high as 50 percent of an employees salary and could be as low as 8 percent 5. China introduced a housing contractual savings scheme Housing Provident Fund (HPF) after a successful 1991 Shanghai

pilot program. Employees and employers are required to contribute an equal percentage of an employees salary to the fund which can only be used for the employees housing related needs, including housing purchases and maintenance. HPF is a key player in providing affordable housing finance in China. The interest rate of HPF loans is lower than those provided by commercial banks. Indias Housing Development Finance Corporation also introduced a contractual savings program that was eventually discontinued.

SECURITISATION
In Asia, securitisation has been used to raise capital for housing. However, compared to other regions, securitisations growth has been slow. The mortgage finance industry is still relatively small and the mortgage to credit ratio is only 5 percent, which is lower than any other region (Figure 1).

3 UN-HABITAT (2008), Housing for All, Nairobi: UN-HABITAT 4 UN-HABITAT (2009), Community Development Fund in Thailand, Nairobi: UN-HABITAT 5

UN-HABITAT (2008), Housing for All, Nairobi: UN-HABITAT

FIGURE 1 MORTGAGE TO CREDIT RATIO

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Source : Asian Development Bank

Between 2000 and 2006, mortgage-backed securities (MBS) issuances increased from US$ 3 billion to US$ 44 billion, much faster than the growth of other asset-based securities. Hong Kong, India, Japan, South Korea and Malaysia housing-finance institutions led to this MBS growth. Government housing finance institutions are key actors in the growing MBSs and domestic bond markets 6.

housing institutions provide more mortgage loans than their private counterparts.

non-profit making projects. These subsidy types are practiced in Sri Lanka, Indonesia, Malaysia, China and India.

HOUSING SUBSIDIES HOUSING MICROFINANCE

Many countries in Asia have housing subsidy programs. Direct subsidies are directly built into Chinas salary system and Iran provides interest rate subsidies. In India, subsidies are targeted for extremely low income groups. Development-related subsidies including low-price housing are provided in China, Hong Kong, Malaysia and Indonesia. Indonesia, Philippines, Bangladesh and India have developed viable housing microfinance products specifically for low income housing needs. The Community Mortgage Program in Philippines is a microfinance program that provides loans from US$ 360 to US$ 1,927 per household to purchase land, develop sites or to construct houses 7. The Grameen Bank in Bangladesh provides housing microfinance to the poorest. It provides three types of micro loans including Pre-Housing Loans, Basic Housing Loans, and Moderate Housing Loans.

MORTGAGE LOANS BY GOVERNMENTS

Singapore offers government mortgage loans that target public homebuyers who qualify for subsidised mortgage loan interest rates. These loans are repayable to the government over 20 years at low interest rates. In Thailand and South Korea, the government

CROSS SUBSIDIES
Cross subsidies may be provided through single or multiple projects where wealthy buyers subsidise low-income people. Alternatively profit-making projects subsidise

Ziemba, Rachel (2008), Housing Finance in Asia, http://www.rgemonitor.com/economonitor-monitor/235952/ editors_pick_housing_finance_in_asia, accessed 5/9/2009 7 UN-HABITAT (2009), Community Mortgage Programme in Philippines, Nairobi: UN-HABITAT

The maximum loan sizes for these three types of loans are respectively, US$ 177, US$ 250, and US$ 521 8.

CONCLUSIONS AND RECOMMENDATIONS

Although Asias housing finance market is small, it has great potential for development and growth. A key 21st century challenge is developing housing finance instruments that will satisfy its ever-growing and distinct housing needs. A crucial task is developing the necessary internal conditions or/and instruments for mobilizing domestic savings. A market-oriented enabling domestic environment is vital for mobilizing domestic resources. Countries are encouraged to introduce economic and financial reforms to liberalize their domestic financial markets to enhance their domestic financial markets efficiency, coherency and consistency. The housing finance industry should be encouraged to practice good governance to build private housing sector investment and trust. Appropriate policy and regulatory frameworks should be developed in each country to speed-up the development of market-oriented housing finance mechanisms and instruments. Countries should introduce appropriate legal reforms that ensure private property rights and enhance mortgage financing environments.

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NON-GOVERNMENTAL ORGANIZATIONS, COMMUNITY-BASED ORGANIZATIONS AND COOPERATIVES

Non-Governmental Organizations (NGOs), Community-Based Organi -zations (CBOs) and cooperatives can serve a large segment of the low income housing finance market. They are considered to be more efficient and effective because they tend to have grassroots presence among the poor. Although NGOs have access to the poor, examples of such bodies providing or facilitating home loans are still a rare phenomenon. However, some NGOs and CBOs are slowly becoming involved in this segment. The purpose of the loan is generally fixed; conventional and non-conventional collateral is required and loan maturity is medium to long term and repayment schedules are f l e x i b l e 9 . Community-based initiatives are well developed in India, Philippines and Thailand.

To attract private sector investment and individuals to the housing sector, countries should also introduce specific measures that are appropriate for their own legal environments and yet provide comfort to investors. Domestic capital markets must also be further developed to mobilize housing finance capital and issue securitization instruments that provide more liquidity to the housing finance markets. Housing microfinance products should also be promoted to reach the poorest population segments, particularly in countries which have large poor populations. Countries should be encouraged to develop appropriate subsidy programs that target the poor and meet the social needs of the housing sector. They should also be encouraged to motivate individuals and groups through communitybased and cooperative housing organizations. Local governments also play a very important role. Countries are encouraged to introduce fiscal decentralization to strengthen the fiscal and financial capacity of local governments for urban development at local levels.

8 Barua, Dipal Chandra (1991) Experience of Grameen Bank Housing Programme, Dhaka: Grameen Bank 9

UN-HABITAT (2008), Housing Finance Instruments in Thailand, Nairobi: UN-HABITAT